August economic activity worse than 2008 financial crisis, says Nomura

GDP growth in Q2 may dip below 5%; full-year forecast of 6% gets riskier, it says

Economic activity in August 2019 was weaker than that observed in 2008-09 when the global financial crisis hit developed economies as well as India fairly hard, global markets research agency Nomura has noted in a report.

Its monthly activity indicator (MAI), which is a three-month moving average of 19 high-frequency indicators, which include factory activity, services output, and trade and taxes, contracted 0.9 per cent over the previous year 

(August 2019 over 2018), the worst since when the data is available (2007). The MAI had grown 1.2 per cent in the June quarter.

This meant that economic turmoil did not bottom out in the April–June quarter, the report said. That quarter saw gross domestic product (GDP) growing at 5 per cent, the slowest in more than six years.

This could assume importance on the backdrop of an expected rate cut by the monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Friday. Nomura expects the RBI’s MPC to cut the repo rate by 40 basis points, to take it to 5 per cent. 

“Railway traffic, cars and two-wheeler sales, medium and heavy commercial vehicles sales, and non-oil, non-gold imports are the indicators, which are the biggest drag on the economic momentum in August,” Sonal Varma, 

India and Asia ex-Japan chief economist at Nomura told Business Standard.

Nomura was the first global agency to slash the growth forecast for the Indian economy to 6 per cent earlier this year. The RBI reduced the estimate of GDP growth in FY20 to 6.9 per cent in the August MPC meeting.

The report also said that with this development, the downside risks to the annual FY20 forecast of 6 per cent have become stronger.

Core sector companies produced lower than a year ago in August; imports also contracted during the same month, government data had shown.

The MAI had always grown since 2007, Nomura data showed. This is the first time it has contracted since the pre-crisis years. Tighter financial conditions because of a crisis in the non-banking financial companies (NBFC) sector played a much bigger role than anticipated, the report said.